A REIT reports the following financial information on a per share basis: GAAP Ne

Question

A REIT reports the following financial information on a per share basis:

GAAP Net Income: $4.50
Depreciation: $3.50
Dividend paid: $5.00
Debt=$50, with an average interest rate=8%
This REIT is traded at a 15% premium to the net asset value, and the private Real Estate market cap rate is 10%.

(a) What is the minimum dividend the firm must pay to shareholders to be a REIT?

(b) What is the net operating income of all the properties within the REIT? (Hint: NOI=FFO+INT)

(c) What is the Net Asset Value (NAV) of this REIT?

(d) What is the share price of the REIT?

Explanation / Answer

a) Minimum dividend payment in a REIT is 90%

Dividend paid in RIET = 90% ($5.00) = $4.50

b) Net operating income in REIT is the sum of Funds from operations and interest expense.

NOI = (Net income + Depreciation) + (Interest expense)

       = ($4.50 + $3.50) + (0.08 X $50)

       = $8.00 + $4.00 = $12.00

c) Compute the net asset value by dividing the net operating income by the market cap rate and then deducting the mortgage debt.

Net asset value = (net operating income / Market cap rate) - Debt

                         = ($12.00 / 0.10) - $50

                         = $70

d) Compute the per share value in REIT:

Deduct assets minus debt to find the value of equity.

Equity = $70.00 - $50.00 = $20.00

Since the number of common shares are not given, the per share value cannot be found.

Divide the value of equity by the number of common shares to find the per share value of REIT.

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